Regulator calls for more discussion on unbundling

Unbundling research and commission payments should only be attempted after a full political discussion at the European level, according to a senior French regulator.

Unbundling research and commission payments should only be attempted after a full political discussion at the European level, according to a senior French regulator.

Philippe Guillot, executive director of the Markets Directorate at the Autorité des Marchés Financiers (AMF), said the issue should not have been included as part of MiFID II’s first consultation paper, published in May this year, as it had not been adequately debated as part of European policymaking.

"Unbundling has become part of MiFID II's rules on inducements, but it was never a part of the political agreement. This is something that needs to be discussed more thoroughly," he told

The first consultation paper and discussion paper on MiFID II, published by the European Securities and Markets Authority (ESMA) in May this year, contained an unexpected additional proposal on inducements.

It said that minor research work could continue to be paid for through execution commissions but that more substantial research work would have to be paid for directly by the asset manager out of their management fees.

The ESMA paper shocked the industry by going further than similar rules implemented in the UK by the Financial Conduct Authority, which require asset managers to set stricter research budgets and be more transparent on the actual costs of execution and research, but stopped short of forcing asset managers to directly pay for non-execution services.

However, while the FCA has been a keen supporter of unbundling, Guillot said this is such a significant change for the buy-side that it should not be ESMA’s decision.

"This is a level one issue that should have been discussed at the European level and backed by a political agreement, it was not optimal to introduce unbundling as part of the level two text," he added.

A flawed model

Criticisms of the fully unbundled model include the potential impact it would have on coverage of small and mid-cap stocks that may not see sufficient trading volume to justify asset managers paying the true cost of this research.

Guillot said, “The problem with a fully unbundled model is that, for mid-caps in particular, there is no critical mass in trading to justify the cost of the research, so those stocks need some form of cross-subsidisation.

“It's also not clear how you would be able to determine which research is good before buying it. There are still far too many issues to be discussed before implementing new rules on research and commissions."

He wants ESMA to drop the current proposals for unbundling from MiFID II and allow the European Commission to decide whether a new directive is needed to tackle any problems in the existing research market.

Meanwhile, a recent Markit event, which gathered buy- and sell-side customers of its Commission Manager tool to discuss the issue, found significant resistance to the proposed changes.

An audience survey found 65% of attendees did not support the proposals. Panelists at the event said significant progress has been made by the buy-side to make research and execution costs more transparent, with 94% of audience members stating they use commission sharing agreement (CSA) services and 68% use broker voting to allocate funds to the houses producing the best research.